Payroll lite

Marie M. Schofield, CFA, Chief Economist and Senior Portfolio Manager | August 8, 2013

  • Latest payroll data came in below expectations, but it will not change the Fed’s view on tapering quantitative easing sometime before year end.
  • Disproportionate gains in part-time workers warrant higher scrutiny for a number of reasons, including implications for income and consumer spending.
  • Payroll data supports the view that the economy seems stuck near 2% real growth or less, with no signs yet to suggest a shift to a higher trajectory.

The July Non-Farm payroll report from the business survey came in a little light, showing job growth of 162K, below expectations and below the six-month average of 200K. On top of that, net revisions to the prior two months showed a decrease of 26K jobs.

  • Government jobs are still being cut at the Federal (-2K) and State (-3K) level, but Local Government has begun to staff again with gains of 6K.
  • The largest contributor to payrolls was from Retail with a 47K gain that was well above prior monthly averages.
  • Please note that 53% of all jobs created in July went to retail and restaurant workers, continuing a theme seen recently related to an employer preference for adding part-time workers. These two categories account for only 19% of the total workforce and are seeing expansive growth in jobs but little growth in average hourly earnings and hours.
  • Health Care limped in with a 8K gain, the weakest since 2003, on job cuts in hospital and nursing care facilities that have seen Medicare payments reduced (due to the sequester) and are feeling cost pressures from the Affordable Care Act.

The business survey report has seen more tepid job growth in the last three months averaging about 175K. This is down modestly from 200K quarterly averages seen in the winter and spring, but still fits into the 150K to 200K range over the last year or two. On balance this is likely disappointing to the Fed who is hoping for faster and broader gains.

The report from the Household Survey had one piece of good news as the Unemployment Rate ticked down to 7.4% from 7.6% in July to a new cycle low and is closing in on Bernanke’s announced 7% threshold for ending QE. This came on a -263K decline in Unemployed with 226K gain in Civilian Employment against a smaller -37K decline in the Labor Force. Outside of that, the report was generally weaker. The Participation Rate ticked down slightly to 63.4 from 63.5 with much of the decline seen among younger workers. Average Hourly Earnings also fell 0.1%, the first decline in nine months, and is up 1.9% YoY a rate basically unchanged over the last two years. This represents a very soft start for labor income in Q3.

In July Part-Time jobs again outpaced Full Time jobs, +174K to +92K. Incredibly in the last four months, Full Time jobs rose 187K but Part-Time jobs rose 791K. Part Time jobs are associated with lower hours and lower overall wages and as a result, do not have the same income power and economic force as full time jobs. The private sector Workweek fell to 34.4 hours, the weakest reading in six months—also consistent with the recently noted outsized gains in part-time hiring.

The swelling gains in Part Time workers warrant higher scrutiny for a number of reasons. It may indicate continued business caution and uncertainty about future prospects which could hold back business spending. It also means aggregate income trends may remain soft with consequences for consumer spending.

While the July labor report did not meet expectations, it was consistent with past trends and, importantly, it will not change the Fed’s view on tapering QE sometime before year end. However, it does argue for patience and validate an economy that seems stuck near 2% real growth or less with no signs yet to suggest a shift to a higher trajectory.

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